Freedom bankruptcy unlikely to delay cleanup

In this Jan. 13, 2014, photo, workers inspect an area outside a retaining wall around storage tanks where a chemical leaked into the Elk River at Freedom Industries storage facility in Charleston, W.Va. The chemical spill that contaminated water for hundreds of thousands of West Virginians is just the latest and most high-profile case of coal polluting the nation's waters. An Associated Press analysis of federal environmental data found chemicals and waste from the coal industry have tainted hundreds of waterways and groundwater supplies for decades, spoiling private wells, shutting down fishing and rendering streams virtually lifeless.

CHARLESTON, W.Va. -- Government officials will likely be able to ensure that Freedom Industries continues to fund cleanup efforts along the Elk River, but now that the company has filed for bankruptcy, it may be more difficult for them to levy any fines or punishment against the company, a bankruptcy expert said Sunday.

A bankruptcy filing puts a temporary hold, or stay, on all claims for a company to pay its debts.

But there is an exception in bankruptcy code so that government agencies can exercise "police powers," which would likely include environmental cleanup.

"The automatic stay does not stop agencies such as the EPA from enforcing cleanup orders," said Bob Simons, a prominent bankruptcy lawyer with the Pittsburgh firm Reed Smith. "Police powers to protect the health and safety of the public are not stayed by the bankruptcy."

But those police powers would likely not apply to any punishment that the agencies might levy.

"If there were a pecuniary claim, like a fine, arguably the fine is like a debt," Simons, who stressed he was not familiar with Freedom's specific filing, said. "That fine may be treated in the bankruptcy case as any other debt would be."

Shortly after Freedom filed for bankruptcy on Friday, state and federal environmental agencies released statements saying they expected the company to continue its environmental cleanup along the Elk River, where the company's spill of a coal-processing chemical left hundreds of thousands of West Virginia without usable water for days.

"Freedom Industries continues to perform cleanup activities at its tank facility and has indicated that the company intends to continue the cleanup, despite having filed for Chapter 11 bankruptcy," the federal Environmental Protection Agency wrote on Saturday. "If circumstances change, EPA will work with West Virginia officials on the most appropriate path forward."

On Friday evening, a spokesman for the state Department of Environmental Protection released a statement in all capital letters that said, "A company's bankruptcy status does not absolve it of its environmental remediation obligations."

Half an hour later, DEP Secretary Randy Huffman elaborated.

"At this point, Freedom has committed to continuing its cleanup effort. Any contingency to that would consist of a plan developed by many parties including the DEP," Huffman wrote. "While details have not yet been fully developed regarding how to fund the remediation in such a scenario, the remediation efforts will still continue as long as necessary."

Shortly after Freedom filed for bankruptcy on Friday, the company also filed what's called a "debtor-in-possession," or DIP, agreement, which would allow it to secure an emergency loan to continue functioning.

In the DIP agreement, Freedom specifies three "permitted liens," which will likely get first priority when Freedom begins to pay back its creditors.

First in line is a lien filed by PPG Industries, a large Pittsburgh-based corporation with facilities in 38 countries.

Among other things, PPG supplies industrial coatings and sealants for planes and cars and makes paints and stains. The company sold a plant in West Virginia's Northern Panhandle in 2012.

"PPG is aware of the news related to Freedom Industries and will evaluate whether there is any affect on our business," Mark Silvey, a PPG spokesman, wrote in an email Sunday. Neither the DIP agreement nor Silvey specified the size of the lien.

Next in line is the IRS, with two liens on Freedom's property filed in 2010, totaling about $2.4 million. A third, much smaller, lien filed by the IRS in 2009 is not listed on the DIP agreement.

After the "permitted liens," the next creditor in line is almost always the DIP lender, Simons said. Simons said that the DIP lender is given priority because they put money in when the company was most at risk.

"The reality is they need to have money to operate," he said.

The exact identity of Freedom's DIP lender is a little opaque.

The listed lender is WV Funding LLC, a company that was not listed with the West Virginia secretary of state on Friday. Updated listings now show that it was incorporated on Friday, the day Freedom filed for bankruptcy.

WV Funding's one listed member is a company called Mountaineer Funding, LLC.

Mountaineer Funding was also founded on Friday, according to secretary of state filings. There is also a space for Mountaineer Funding to sign on the DIP agreement.

Mountaineer Funding's one listed member is J. Clifford Forrest.

J. Clifford Forrest also appears to be the owner of Freedom Industries. A source close to Freedom, who refused to be identified because of pending litigation, confirmed that Forrest owns Chemstream Holdings, Freedom's parent company, although that could not be confirmed by any official documents.

Chemstream Holdings also shares a Pennsylvania address with Rosebud Mining Company, which lists Forrest as its president.

Chemstream is listed as Freedom's owner in the bankruptcy filing, although Forrest's name does not appear.

Simons said that it's unusual but not unheard of for a DIP lender to be very closely related to the company receiving the money.

"My reaction is that it's not necessarily improper," Simons said. "I would suggest that it would be subject to more scrutiny, but as long as it's disclosed and it's subject to the appropriate scrutiny and the parties have the opportunity to object, then it will probably stand up."

Forrest, who has not responded to repeated requests for comment, appears to have significant assets aside from Chemstream and Freedom.

Rosebud Mining owns 28 coal mines and eight coal preparation plants, according to its website. As of September, it employed nearly 1,300 people, according to its website. It is the third largest coal producer in Pennsylvania, the fourth largest in Ohio and the 21st largest in the nation.

Forrest also owns The Lodge at Glendorn, a 1,280-acre luxury resort in northern Pennsylvania. The resort has one main lodge and 12 cabins, with rooms and cabins that book for between $450 and $1,395 per night.

Simons said that Freedom's creditors and potential creditors, including lawyers who have already filed more than two dozen lawsuits against the company, will closely examine Freedom's corporate structure, looking to get paid.

Separate companies, even with the same ownership, are generally not liable for one another's debts in bankruptcy filings.

Simons said that creditors would try to do what's called "piercing the corporate veil;" and prove that affiliated companies are operating for the same purpose. That ruling would be up to a bankruptcy judge.

"Superficially, right now, it would seem like only Freedom's going to be liable," Simons said. "But if you find that another company is virtually the altar ego of one company, then they're as liable as the one company."

Expedited hearings are scheduled for Tuesday afternoon to consider several of Freedom's bankruptcy-related filings.